TEXT C Adam Smith, the Scottish
professor of moral philosophy, was thrilled by his recognition of order in the
economic system. His book, The Wealth of Nations (1776), is the germinal
book in the field of economics which earned him the title, the father of
economics. In Smith’s view, a nation’s wealth was dependent upon
production, not agriculture alone. How much it produced, he believed, depended
upon how well it combined labour and the other factors of production. The more
efficient the combination, the greater the output, and the greater the nation’s
wealth. The essence of Smith’s economic philosophy was his
belief that an economy would work best if left to function on its own without
government regulation. In those circumstances, self-interest would lead business
firms to produce only those products that consumers wanted, and to produce them
at the lowest possible cost. They would do this, not as a means of benefiting
society, but in an effort to outperform their competitors and gain the greatest
profit. But all this self-interest would benefit society as a whole by providing
it with more and better goods and services, at the lowest prices.
Smith said in his book: "Every individual endeavours to employ his capital
so that its produce may be of greatest value. He generally neither intends to
promote the public interest, nor knows how much he is promoting it. He intends
only his own security, only his own gain. And he is in this led by an ’invisible
hand’ to promote that which was no part of his intention. By pursuing his own
interest he frequently promotes that of society more effectually than when he
really intends to promote." The "invisible hand" was Smith’s
name for the economic forces that we today would call supply and demand, Smith
agreed with the physiocrats and their policy of "laissez faire", letting
individuals and businesses function without interference from government
regulation. In that way the "invisible hand" would be free to guide the economy
and maximize production. Smith was very critical of monopolies
which restricted the competition that he saw as vital for economic prosperity.
He recognized that the virtues of the market mechanism are fully realized only
when the checks and balances of perfect competition are present. Perfect
competition refers to a market in which no firm or consumer is large enough to
affect the market price. The "invisible hand" theory is about economies in which
all the markets are perfectly competitive. In such circumstances, markets will
produce an efficient allocation of resources, so that an economy is on its
production-possibility frontier. When all industries are subject to the checks
and balances of perfect competition, markets can produce an efficient bundle of
products with the most efficient techniques and using the minimum amount of
inputs. But when monopolies become pervasive, the remarkable efficiency
properties of the invisible hand may be destroyed. What does the "invisible hand" refer to
A.Supply and demand. B.Laissez faire. C.Self-interest. D.Non-interference from the government.